To IPO or Not to IPO? SPAC is the question

An initial public offering is the classic way to take a company public, but many crypto companies bypass the regulatory scrutiny with a backdoor SPAC merger

By Connor Sephton

If you want to sell stock in an American company to the public, traditionally you hold an initial public offering, better known as an IPO. 

An IPO starts with the long, arduous, and expensive process of filing an S-1 Registration Statement with the Securities and Exchange Commission (SEC). 

Of course, the purpose of an S-1 is to make sure companies are disclosing everything the public needs to know to make an informed decision about buying shares in your company, otherwise known as securities.

Which is something cryptocurrency companies tried to avoid by holding initial coin offerings, and why the SEC stomped so hard on the ICOs, suing the likes of DAO, Block.one, Telegram, and currently Ripple, levying multi-million-dollar fines and even forcing some companies to return the money raised to investors. Telegram was forced to return $1.2 billion of the $1.7 billion it raised from investors — giving them a very large haircut — as well as paying an $18.5 million fine.

And while several crypto companies have recently launched successful IPOs, there are several other routes to going public. Among them are direct public offerings, the “mini-IPOs” carried out under the SEC’s Regulation A, or the “private placement” sales under Reg. D — which severely limit the amount that can be raised or the number of investors eligible to participate. 

Another more aggressive way to decrease SEC scrutiny is the increasingly popular SPAC, which is a backdoor that involves being acquired by a public company created especially for that purpose. 

The old-fashioned way

Until recently, crypto had, by and large, opted out of IPOs. Top U.S. exchange Coinbase was the largest “pure” crypto company to go public, and it took the direct listing route, avoiding underwriters.

But that changed when trading platform INX completed the first token IPO in early May, followed shortly by Swedish crypto broker Safello. And crypto-friendly Robinhood — which got into very hot water over the recent GameStop debacle, followed by a Dogecoin SNAFU — is now going the IPO route.

There’s a reason so many firms have avoided IPOs, however. Along with the time an IPO takes — generally 12 to 18 months — the listing company works closely with a major middleman, the underwriter.

Underwriters are large Wall Street financial institutions that work closely with the listing company on regulatory issues, oversee the extensive marketing roadshow, help them set the right stock price, and then buy the shares and resell them through their networks of big institutional customers — for a hefty commission. 

That means IPOs not only cost a lot, they make it very hard for the little investor to get a piece of high-profile listings. That’s an issue of fairness that Coinbase pointed to when it chose to go direct, which meant just listing and selling shares (COIN) on the Nasdaq. 

SPAC door

A SPAC is what’s called a “blank check company” — one created solely for the purpose of allowing private companies to go public without going through a full IPO.

The SPAC raises money in an SEC-registered IPO that can only be used for one purpose — to acquire a private company — and is usually only listed on a major exchange like the NYSE or Nasdaq after the acquisition.

It’s an increasingly popular option, and one that the crypto — and especially fintech — industry has embraced. In January, ICE-owned cryptocurrency exchange Bakkt announced plans to merge with VPC Impact Acquisition Holdings in a SPAC that will see it listed on the NYSE.

In March, the social trading platform eToro, a Robinhood competitor which handles both crypto and stocks, announced plans to go public through a $10.4 billion SPAC merger with the creatively named FinTech Acquisition Corp. V. 

That same month Bitfury-owned bitcoin mining firm Cipher announced a SPAC merger that valued it at $2 billion and is expected leave the merged firms with nearly $600 million in cash.

Pros and cons

SPACs have a number of advantages, starting with speed. An IPO can take 12 to 18 months, versus a SPAC’s three to six.

Then there’s money. How much an IPO raises depends on market conditions when it happens whereas a SPAC’s price is negotiated ahead of time. 

The cost of marketing is much lower than with an IPO’s extended road show, and as SPACs are generally sponsored by people with experience in finance and industry, companies can get expert advice.

On the other hand, SPAC sponsors usually keep a 20% share in the SPAC after the merger, diluting existing shareholders’ holdings. And, SPAC investors can redeem their shares immediately, which comes off the top of the funds raised.

Beyond that, there is still plenty of SEC paperwork to file and less time to do it, as well as less of the due diligence that comes with an IPOs rigors. And, an IPO’s underwriter checks that all the regulatory requirements are met, a review SPACs don’t benefit from.

Then there’s credibility. Going the IPO route brings that in a way SPACs don’t.

Private placements and mini-IPOs

Regulations A and D a popular one for cryptocurrency companies that want to go public but don’t have the size and resources for a full IPO. 

The SEC’s Reg. D is fairly simple: Known as private placement, it comes under the IPO regulations, but the buyers must all be “accredited” investors — read “rich” or “expert”— and the disclosure hurdles are substantially lower. But, investors generally cannot sell their shares for one year.

Telegram tried to use a variation of this route with its TON blockchain, pre-selling tokens to a group of sophisticated investors under Reg. D, who would resell them to the public after the blockchain went live went live — a process called a simple agreement for future tokens (SAFT). The SEC, however, simply called it a somewhat delayed securities offering, sued, and got a court to delay the TON token sale during litigation. That forced Telegram to back down.

Reg. A, also known as a mini-IPO, is substantially more egalitarian. One company that just made it work very well is Exodus, a cryptocurrency wallet maker that recently raised $75 million — the maximum allowed under Reg. A+, which is open to any buyer. And the shares may be sold the next day.

And while the mini-IPO may be considered less onerous, it isn’t easy Exodus CEO JP Richardson said in a recent CoinTelegraph YouTube AMA. 

“It’s very similar to actually doing an IPO and going through the whole process,” Richardson said. “We found one of the greatest law firms out there to help us with this — Wilson Sonsini, the same firm that did something similar with Blockstack. We started this process in the summer of 2020. We submitted a 200-page offering document” confidentially to the SEC in September. 

Which was good timing, as it was just after MicroStrategy began pouring hundreds of millions of dollars into Bitcoin and PayPal got into cryptocurrency, sparking a long bull market, Richardson added. Rallying the whole company, Exodus began selling stock on April 8. But there were no underwriters or stock exchanges involved. 

Instead, Exodus sold its stock via its own wallet, in what was “a proof of concept to show the world that this is possible,” Richardson said, adding that Exodus planned to use its experience to create a mini-IPO package for crypto firms. 

“We build in all the components from the actual offering itself, to the issuance of the stock, to the actual secondary trading,” he said “Then we will go to other companies and say, come on in. You can do a stock public offering right inside the Exodus platform. And the cool thing is you can buy legal stock at nighttime, you can buy it on a Saturday or Sunday — just like the internet. The internet ever sleeps, our stock never sleeps. And that’s how it should be.”